Borrowing money is a complex issue for adults and can end up being a very emotional problem for people who weren’t given good training about borrowing when they were children.
Whether a loan is on a credit card or for a house or car, there is pretty much no way to avoid borrowing money at some point in every person’s life.
As a result, learning to understand the ramifications of borrowing money should be started early in a child’s life.
Before a child even starts school, they can start learning this important concept. It’s too early to discuss borrowing money, so they can begin to learn about this topic by borrowing toys.
Explain to them that they can borrow a friend’s toy for just a short while and that they’ll need to return it. At first, start with very short periods of time, but eventually extend the loan to the complete length of playtime, always making sure that they return the toy when playtime is over.
Once they start primary school, you can start to transfer what they learned about borrowing toys into the concept of borrowing money. Stop at a store with your child at a time when you know they don’t have their pocket money with them. Make sure it’s a store where they’ll want to buy something.
Explain to them that you’ll be happy to lend them a small amount if they want to buy something and that they can then repay you as soon as you return home. You might even have them sign an IOU for the amount of money they’ve borrowed. The physical paper with their signed IOU will make the concept more concrete for your young child.
Once you can see that your child understands borrowing and repaying money from you, you can then move to explaining the more complex issue of borrowing money from a bank for larger items and paying interest on the loan. You can explain that borrowing from a bank is how you were able to buy your house or car.
Make sure that they understand that paying interest on a loan means that the borrower ends up paying more for the house or the car than if they’d bought it with money that they’d saved.
When your child is in high school, they are likely to want to buy electronic items and may find it difficult to wait until they’ve saved enough for the purchase. In this case, they may come to you for a loan.
If you decide to lend money to them, make sure that they understand how repayments will work. You can set up a repayment schedule online that you both can access. On the payment dates, meet with your child and open up the online schedule to log the payment in together so that there will never be a dispute about whether a payment was made.
It’s never too late or too early to explain to them the difference between good borrowing and bad borrowing. Good borrowing is when you borrow money for something you don’t have money for now but in the future it will likely go up in value or produce an income. Shares, investment properties and even your family home are good examples of this. See more on investing. Bad borrowing is when you borrow money for something you don’t have money for now but what you buy doesn’t go up in value or produce an income. Things like buying clothes or cars on credit is this sort of loan. Sometimes you just need these things now but always remember that there is a cost to borrowing so these things will end up costing you more in the long run.
One thing to pay particular attention to is pay day loans or cash loans / same day loans. Businesses like this thrive on those who need cash quickly so charge astronomical interest rates. It is sometimes hard to get out of debt with this sort of loan. These are best avoided if possible.
These types of exercises about borrowing will give your child the kind of training they need to understand how to deal with borrowing money in the real world as an adult. Remember that training your child about borrowing is just as critical as all the other lessons you give your child so that they will be a money savvy adult.
See more on financial literacy basics.
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